Kmart firms again amid overall quiet pre-MLK dealings; Longview Fibre deal upsizes

By Paul Deckelman and Paul Harris

New York, Jan. 18 - The high yield market essentially went through the motions Friday, with activity dull during an abbreviated pre-holiday session. Kmart Corp.'s battered bonds were heard slightly higher, as the breathtaking slide in the big retailer's debt and stock took a pause, letting market participants ponder over what happens next.

In the primary market, however, Longview Fibre Co.'s new deal was increased to $215 million and priced at 99.379 to yield 10 1/8%.

The seven-year offering was upsized from $185 million. Banc of America Securities ran the Washington state forestry company's deal.

The increase continued a trend this year; one sell-sider commented that although the 2002 primary market may not be seeing the volume of issuance that some were expecting, demand reflecting strong cash positions on the buy-side appears to be manifesting itself in upsized issuance.

Of 11 separate issuers who have brought $4.53 billion (plus €214 million) worth of new paper thus far in 2002, seven have seen their deals upsize: AMC Entertainment, Charter Communications, Coinmach, Constellation Brands, Longview Fibre, and Owens-Brockway. Most dramatic was the Owens offering, increased to $1 billion from an announced $300 million.

"I still think there's a lot of cash that hasn't been put to work yet," the official said. "I'm a little surprised that we haven't seen more new issuance this month than we have.

"And since we haven't seen more deals, you're seeing the fewer deals that are getting done being upsized because there is money that needs to be put to work.

"We haven't had the kind of rush that people anticipated because I think you have companies waiting to get better vision on what their year-end numbers are going to look like, because they don't want to come out and surprise people."

This official also pointed to a pair of deals that priced during the week of Jan. 14 - the Consellation Brands drive-by and Coinmach - and observed further evidence of the high yield market's present high liquidity.

"With Coinmach, you had a single-B credit with execution at 9%. I thought that was extremely good execution."

Constellation Brands also got the attention another official, from another investment bank.

"Obviously that was a very successful offering," the official said. "Whenever a company like that gets done at those types of levels I think it's phenomenal. You're talking 8 1/8% for a Ba3/B+ rated company. That's just 320 (basis points) over (Treasuries)."

News also circulated during Friday's abbreviated session on business lined up for the week of Jan. 22.

Price talk is expected Tuesday on Compton Petroleum Corp. $150 million 10-year notes via Lehman Brothers, according to a syndicate official who added that the deal is expected to price Wednesday.

Price talk of 8¾%-9% did emerge Friday on Pathmark Stores $200 million ten-year notes via Dresdner Kleinwort Wasserstein. It is expected to price Wednesday or Thursday.

In addition to Compton and Pathmark, the four-day week of Jan. 22 expects to see deals from Coventry Health Care ($175 million), U.S. Oncology ($175 million), TSI Telecommunications ($245 million), Azteca Holdings ($150 million), and PanAmSat ($500 million).

In the secondary, a trader said that it was "very, very quiet, with not a whole bunch of stuff going on," with the market closing at 2 p.m. ET ahead of Monday's Martin Luther King Day holiday, which will completely shutter the U.S. financial markets.

"We tried to get started in the morning, and a couple of things traded around 8:30 or 9 o'clock (ET), but after that, it was just gone." He lamented just before the close that "I've been sitting here for the last two hours with not much to do."

"Nothing was going on," another trader said. "The market was dead."

He saw the trio of new issues which had priced during Thursday's session holding pretty much unchanged from Thursday's closing levels, which in each case was up at least a point from their issue prices.

Coinmach Corp.'s new 9% senior notes due 2010, which had priced at par, were quoted hanging around the same bid levels at 101 to 101.5 to which they rose late Thursday after they had been freed for secondary dealings. Also holding around that same 101-101.5 area was Constellation Brands Inc.'s new 8 1/8% senior subordinated notes due 2012. That was likewise up from the drive-by issue's par pricing level Thursday. And Regal Cinemas Corp.'s new 9 3/8% senior subordinated notes due 2012 were at 101 bid/102 offered, also up from their par issue price, although the trader opined that the bonds might become a bit cheaper than that level.

Meantime, the new Longview Fibre senior subordinated notes were seen late in the session trading up from their issue price. A precise quote was not available.

Among already existing bonds, Kmart's situation continued to absorb what little attention was being paid to the market Friday, what with many market participants absent in hopes of stretching the three-day break into a four-day vacation.

A trader saw Kmart's "whole structure" up about a point or so.

He quoted the company's benchmark 9 3/8% notes due 2006 trading around the 51.5 bid/52.5 offered level, while its 9 7/8% notes due 2008 were at 53 bid/55 offered. Meanwhile, the credit's longer-dated paper was trading at 47 bid/49 offered.

The trader also saw "a lot" of the Troy, Mich.-based discount retailing giant's structured paper (i.e., secured notes backed by collateral such as real estate or dedicated revenue streams) trading, although he noted that it was mostly "trade by appointment (i.e., private transactions); there's no real market in the stuff." Price levels on the structured paper "had actually crept up" into the upper 50s and lower 60s," he added.

Another trader said Kmart "was very little changed. You can look at the stock, up 7% to $1.67 (at midafternoon; it closed up even further) and the preferred up a little bit and in line with that, you could say the bonds were a little stronger," but in reality, he said, trades had been few and far between.

Yet another trader called Kmart "a little stronger , but nothing great." He saw its 8 3/8% notes due 2004 finish around 55.5 bid/56.5 offered, up from Thursday's finish around 54 bid/55 offered.

Kmart bonds, if not exactly setting the world on fire, were at least firmer over the last few sessions of the week, in line with its shares, which finally seemed to get the monkey off their back after having been solidly pounded to new 35-year lows over the previous week on investor angst over slow sales, crumbling credit ratings and the possibility of a Chapter 11 filing. The shares ended up 18 cents (11.54%) in New York Stock Exchange trading at $1.74. Volume of 66 million shares was over six times the recent average daily turnover.

Kmart's announcement Thursday that respected turnaround veteran James B. Adamson would replace the embattled Charles C. "Chuck" Conway as chairman (Conway will remain as chief executive officer) and that Conway loyalist Mark S. Schwartz was out as company president, seemed to tie a tourniquet around some of the bleeding which its securities had seen recently. Kmart's bonds, which began the fledgling new year quoted as high as the mid-to-upper 80s, slid as low as the upper 40s at the beginning of last week, before starting a modest comeback into the 50s at the tail end of the week. Its shares, which were trading above $13 back in August and still around $5 as 2002 opened, are still under $2, and the company lost its slot in Standard & Poor's prestigious equity index, the S&P 500.

How much of a honeymoon - if any - the investors, analysts, credit rating agencies, banks, suppliers and the financial media will give the revamped management team is anyone's guess, and the likely answer is: not much. Adamson - who helped lead the former Flagstar Companies Inc. (now known as Advantica Restaurant Group Inc.) through a prepackaged Chapter 11 reorganization several years ago, during which the Spartanburg S.C.-based restaurant chain operator shed several unprofitable franchises) is considered to be a reassuring presence at the helm. This is especially true since he is not just a restaurant man, but also since he also has prior discount store experience with Target Corp. - the rival retailer whom Kmart, nervously looking in its rear-view mirror, sees gaining market share and quickly moving to overtake Kmart as the Number-Two U.S. discounter behind the seemingly unstoppable Wal-Mart Stores Inc.

But the new president and Conway must deal with customer perceptions that Kmart's 2,100 stores are poorly organized, with higher prices than the much larger Wal-Mart and cheaper quality than the hard-charging Target. They must appease the major ratings agencies, which sharply dropped Kmart's debt ratings with multiple-notch downgrades twice within the space of less than a week to Caa1/CCC-/CCC - and which have kept its bonds on watch for possible further downgrades.

The company remains in talks with its banks about possible supplemental financing facilities, to provide Kmart with some extra liquidity to help it over the rough spots, but the banks are expected to be wary about committing too much capital, in view of Kmart's well-publicized problems. Some of Kmart's suppliers are reportedly grumbling over slow payment and at least two factoring companies - credit grantors for suppliers - were reported during the week to have counseled their clients to stop shipping to Kmart, absent a definitive statement about its future course. And the financial community - notably including Prudential Securities analyst Wayne Hood, who first predicted in early January that there might be a bankruptcy filing in Kmart's future - remains skeptical about whether its current marketing and store renovation strategies will be enough to help it avoid the abyss.

Elsewhere, a trader said Conseco "was a little bit stronger - its 8¾% notes due 2004 were seen at 52-53, up about two points on the session. The Carmel, Ind.-based insurer's bonds had firmed for several sessions following its mid-week announcement that it had bought back an additional $34 million of bonds maturing this year, bringing the total amount of such debt purchased since last June 30 to $266 million, or 30% of the originally outstanding amount.

Late in the session, investment-oriented internet bulletin board buzzed with talk that the company was shaking up its core insurance division - including several changes of key personnel - in hopes of revitalizing its performance. However, the company had released no information on any changes late in the afternoon.

The trader also saw Calpine Corp. debt "up a little bit," with its 8½% notes due 2011 finishing at 87 bid/88 offered, up from 84.5 bid/85.5 offered Thursday night. The San Jose, Calif.-based independent power producer on Thursday increased its previously filed shelf registration to sell debt, shares and other securities by $871 million, bringing the total authorization to $2.5 billion. The company also released downward-revised guidance earlier in the week, cutting its forecast for 2002 earnings by a third to $1.70 per share from $2.45- to- 2.60 previously; it further lowered its 2001 per-share projections to $1.95, from an earlier $2-to-$2.05 range, citing a decline in electricity demand and the resulting fall in power prices and power market profit margins.

Calpine, along with other power producers, has been victimized to a degree by the market's guilt-by association response to the crash of Enron Corp. Meanwhile, a trader said that "some people called me to remark on Enron stock (delisted earlier in the week as ENE by the New York Stock Exchange but reborn as a penny stock as ENRNQ), at 50 cents, up 12.5 cents, and they're saying 'what's going on?' because the bonds are still going down."

He quoted the bankrupt Houston-based energy trading giant's debt around the 18 bid level, "having gotten weaker in the last week-to-10 days. They're all scratching their heads over what to do with it . . . and I don't know."

Enron's fate continues to rest with the U.S. Bankruptcy Court for New York's Southern District, which was hearing testimony Friday afternoon on whether to allow the failed company to sell its core energy-trading business to UBS Warburg.

With many dealers and other market participants not in on Friday ahead of Monday's holiday, market reaction to news that high yield mutual funds had seen a third-straight week of inflows was extremely muted.

Some $361 million more came into the funds than left them in the week ended Wednesday (Jan. 16), according to market participants who track the weekly fund statistics compiled and distributed by AMG Data Services.

It was the third consecutive weekly gain in the mutual fund flow numbers, which are closely watched by many market participants as a reliable barometer of overall market liquidity trends.

The week before, a massive $1.21 billion net inflow - the biggest since at least 1999 - was seen by the junk bond funds. The latest week's inflow brings the net inflow for the new year up to $1.787 billion from the previous week's $1.426 billion, with all three of the weeks so far since the beginning of the year having recorded inflows. That continues an inflow trend which had taken place for most of the final quarter of 2001, after several weeks of sizable ($1.6 billion) outflows in the wake of the Sept. 11 terrorist attacks, which roiled the financial markets. Inflows had risen for nine straight weeks after that, totaling $2.6 billion, before outflows of almost $700 million in the final two weeks of the year tempered that surge.

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